Executive compensation plans have become increasingly complex over the past decade, with companies seeking the right balance of guaranteed vs. performance-based pay to appease both stakeholders and company leaders. Today’s compensation plans may include a combination of a base salary, annual incentives, long-term incentives, equity, benefits, severance and more.
Unfortunately, the demands of their jobs rarely allow executives the time to continually monitor and manage their accounts and make informed decisions that will maximize their pay.
As compensation structures continue to evolve, the need for executives to lean on advisers to understand their options and put a strategic plan in place will only increase. There are four fundamental elements that should be central to any planning strategy.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Recognize and manage exposure to your company
Companies want their executives invested for the long term — a holdover mindset resulting from the dot-com era, when flexible stock options encouraged tech execs to boost their company’s share price long enough to vest their personal shares.
Today, it’s common for a significant portion of an executive’s compensation package to be tied to equity or long-term performance awards. There has been a noticeable shift toward restricted stock, which distributes compensation according to a vesting plan often tied to length of time with the company or performance milestones.
Additionally, many executives will surpass holding requirements and elect to invest even further to show long-term confidence in their company. And while it is important to portray assurance in the firm’s future and leadership, it’s critical to take a step back and diversify your own portfolio. Examine your financials through the lens of key life events — marriage, retirement, children attending school — to develop a strategy that will provide both regular cash flow and an appropriate payout for retirement.
Actively monitor and manage your plan
Maintaining a clear and accurate view of your vested assets is essential for long-term planning. If your stock awards are on a vesting schedule over a five-year period, where 20% vests each year, it can be easy to take a “set it and forget it” approach. But it’s important to sit down annually to revisit how much of your stock has vested, how much is unvested, the value of that stock and the future tax consequences.
This is also a good time to evaluate where you stand in relation to any holding requirements. For example, if you are locked into a holding requirement at the time your stock vests, and are therefore unable to sell your stock to meet the tax liability of those awards, you’ll need to have a plan to cover those taxes with available cash.
Optimize your deferred compensation payout
It’s important to weigh both tax strategies and cash flow needs when determining how your deferred income should be distributed. Mapping out your anticipated income in retirement is the first step.
Take the example of an executive in his early 60s. He has significant savings and six months to go until retirement. He has been contributing to a deferred compensation plan for many years and has the option to withdraw in a lump sum, over 10 years, over 15 years, or more.
Our executive will begin receiving his required minimum distributions from his retirement account at age 70.5. Once he hits that point, his RMDs will provide ample cash flow. In order to maintain a consistent lifestyle throughout his retirement, he can bridge the gap between his income and his RMDs by distributing funds from his deferred compensation plan over the next nine years, which would provide ample cash flow.
Connect the various parts of your financial life
By working with a financial adviser with expertise in executive compensation, you can unite all components of your complex financial life. An experienced adviser will start a relationship with your company’s financial and benefits reps to ensure you can see how your entire compensation package comes together.
However, too many executives wait until they are nearing retirement to seek out an adviser. In many cases, they may make elections on the payout of their pension or retirement plan without understanding the entire picture — which impacts their cash flow, tax liability and ultimately their desired lifestyle in retirement.
By engaging a financial adviser early in their career or at least several years in advance of retirement, executives can maximize their compensation package and better plan for their future.
-
Mortgage Demand Rises Slightly As Rates Dip to 7.37%Mortgage demand inched up last week as the 30-year fixed rate reached its lowest level in 10 weeks, economist says.
-
Walmart Launches Parcel Stations To Speed Up Deliveries
Walmart says its parcel stations act like 'mini post offices' to quickly transport more online orders to customers.
-
Retirement Planning in a Time of Inflation and High Interest Rates
Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.
-
Not Confident About Retirement Despite Financial Success?
You’re not alone. Uncertainty related to interest rates, government debt, long-term care and market volatility is making everyone uneasy. What can you do about it?
-
Risk vs Reward: Understanding This Intricate Investing Dance
The stock market can be unpredictable and complex, so having a good grasp on how to mitigate risk is essential.
-
The Best and Worst Ways for Retirees to Give on Giving Tuesday
Cash donations are certainly the most convenient, but you could be overlooking significant tax advantages by taking the easy way.
-
From Breadwinner to Retiree: How to Manage the Transition
Many people arrive at retirement with mixed emotions, including anxiety. Making the transition involves a profound shift in your mindset.
-
It’s Giving Tuesday: Charity Strategies the Wealthy Can Apply
When markets are down and interest rates are high, philanthropy can take a hit. Here are some ways that affluent consumers can make the most of their charitable giving.
-
Looking for a Job? Here’s How Not to Get Hired
A pair of HR consultants offer some advice to help people heading out on interviews to land that job.
-
Three Ways to Protect Your Retirement From Sequence of Returns Risk
Retiring in a down market doesn’t have to ravage your retirement, but safeguarding your savings requires planning well in advance.
